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MTI debunks perception of widespread retail rent spikes

But findings met with scepticism from SMEs, retailers and property watchers
Wednesday, May 21, 2014 - 06:00
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A quarter of the retailers who renewed shop leases last year did so with no rent increases or lower rents, and most retailers faced rental hikes that were in line with inflation over the period of their lease, the Ministry of Trade and Industry (MTI) said yesterday in a finding that could surprise many - PHOTO: SPH

[SINGAPORE] A quarter of the retailers who renewed shop leases last year did so with no rent increases or lower rents, and most retailers faced rental hikes that were in line with inflation over the period of their lease, the Ministry of Trade and Industry (MTI) said yesterday in a finding that could surprise many.

MTI's analysis of retail rental renewal trends, published for the first time in the latest Economic Survey of Singapore (ESS), sought to put in context some retailers' concerns over the steep rent increases they face when renewing contracts, even as the official retail rental index went down in 2012 and 2013.

A related study, also published in the quarterly ESS, found "no evidence" as well for the growing perception that real estate investment trusts (Reits) are driving up retail rents. But this finding was met with considerable scepticism by small and medium-sized enterprises (SMEs) and property market watchers The Business Times spoke to.

The broader study used retail rental transaction data for 2000-2013 from the Inland Revenue Authority of Singapore (Iras) to "more closely approximate the experience of retailers on the ground". MTI found that, while this can vary greatly, most increases were in line with the rate of inflation.

On average, out of the 2,100 leases renewed each year, rents are doubled or more than doubled in one per cent of them. These tended to be leases renewed after longer periods, or leases for shops in more attractive locations, MTI said.

But most of the rental hikes were not as dramatic. The median cumulative increase last year was 5.5 per cent, and 75 per cent of the leases were renewed at rental increases of 14 per cent or less.

In fact, in every year from 2000 to 2013, up to a quarter of retailers had the same or lower, rents on their renewed contracts, a proportion market watchers such as Teo Li Kim, research director at Cushman & Wakefield, found surprising.

MTI permanent secretary Ow Foong Pheng said at the press briefing yesterday: "People who don't experience any increase are quite happy to keep silent and the ones who are feeling the pain of big increases would make more noise, it could be that that's the case ... We're not disputing that some do experience significant increases but it's a small number."

Association of Small and Medium Enterprises (ASME) president Kurt Wee, who raised the issue of sharp rental revisions hurting SMEs earlier this year, yesterday reiterated his call for more data.

"The effective rents are not transparent in the market. This means retailers are unable to plan and are subject to the sales tactics of landlords. It would be wonderful if every organisation has access to this data (from Iras)" he said.

MTI said that more comprehensive retail rental data can be expected at the end of this year. "Existing retail companies looking to renew their leases or new retail companies looking to set up shops will be better placed to make more informed decisions on where to locate their shops to enjoy more competitive rents in the future," the report said.

A second study, by MTI economists Bali Kaur Sodhi and Leong Chi Hoong, found that the higher rents at Reit-owned malls are due to their better location and renovated features - not their ownership by Reits.

The economists noted that a casual observation of rental trends would show that Reit-owned malls have higher rents than single-owner malls, and a higher compounded annual growth rate of 20 per cent between 2009 and 2013, compared to single-owner malls' 9.2 per cent. They think this fuelled the perception in recent years that Reits are driving up retail rents - which was also raised in Parliament last month.

After controlling for characteristics such as asset enhancement works and how far a mall is from an MRT station, the economists found the level of rents in Reit-owned malls to be statistically no different from those at single-owner malls. Controlling for those characteristics, rental growth of Reit-owned malls between 2009 and 2013 also falls to 8.4 per cent, closer to the 6.7 per cent for single-owner malls.

But this need not mean that Reits are not responsible at all for the overall rise in retail rentals, market watchers said.

After all, many property companies take reference from each other's practices and prices, said Nicholas Mak, executive director of research & consultancy at SLP International Property Consultants. "What is undeniable is that the ownership of shopping malls is getting more concentrated in a smaller number of owners, which implies less competition," he added.

Chia Siew Chuin, director of research & advisory at Colliers International, also noted that in Singapore, a few prominent property developers and owners control much of the existing shopping mall stock for investment, which excludes strata-titled retail space. And regardless of ownership structure, their objectives and strategies are often similar.

"If the stock in quality shopping malls can be sufficiently larger, with more developers or landlords adding greater diversity to the retail sector, retailers could then have more options and greater flexibility in their choice of malls, hence accommodating a wider variety of business cost thresholds," Ms Chia said.

To the SME, there is no difference between Reits and other large, well-financed institutional landlords, said ASME's Mr Wee. To him, the CAGR rental growth of 20 per cent from 2009-2013 cited in the study merely confirms aggressive pricing behaviour on the part of Reits. "They are the price leaders and the price setters," he said.

And from a retailer's perspective, HomeFix DIY managing director Low Cheong Kee thinks that Reits do hold better located malls for better fittings and costlier renovation. "But other mall operators are also benchmarking against the Reit-owned malls, thus pushing overall rentals up," he said.

The MTI economists acknowledged that their study was limited, as it does not include indicators that affect how much mall owners can charge their tenants, such as footfall and profitability, for which data was not readily available.